America’s Shrinking Innovation Base


Abstract needed here …


I guess I am not alone in my concerns for the US manufacturing base. I turned on C-Span and Jerry Jasinowski, President of the National Association of Manufacturers (NAM), was speaking on the shrinking base of US manufacturing. I hope it is not too late, but our policy makers in Washington do not seem to understand the issues-and neither does Wall-Street, but we’ll get back to Wall Street later.

“If the U.S. manufacturing base continues to shrink at its present rate and the critical mass is lost, the manufacturing innovation process will shift to other global centers. Once that happens, a decline in U.S. living standards in the future is virtually assured[1],” states NAM. A dramatic kick-off to a very important report.

Why is US Leadership Important?

A recent study sponsored by the NAM called “Securing America”s Future-A Case for a Strong Manufacturing Base”, points out how the innovation process in manufacturing provides enormous benefits for the entire U.S. Economy:

  • Grows the Economy – Manufacturing growth spawns more new economic activity and jobs than any other economic sector. Every $1 of final demand for manufactured goods generates an additional $0.67 in other manufactured products and $0.76 in products and services from nonmanufacturing sectors.
  • Invents the Future – Manufacturers are responsible for almost two-thirds of all private sector R&D-$127 billion in 2002. Spillovers from these R&D investments benefit other manufacturing and nonmanufacturing firms.
  • Generates Productivity Increases – Manufacturing productivity gains are historically higher than those of any other economic sector – over the past two decades, manufacturing averaged twice the annual productivity gains of the rest of the private sector. These gains enable Americans to do more with less, increase our ability to compete, and facilitate higher wages for all employees.
  • Provides More Rewarding Employment – Manufacturing salaries and benefits average $54,000, higher than the average for the total private sector. They also provide higher paid benefits, and opportunities for advanced education and training.
  • Pays the Taxes – Manufacturing has been an important contributor to regional economic growth and tax receipts at all levels of government.

Though manufacturing’s contributions are high, the US position as a global manufacturer has significantly diminished:

  • Loss of Jobs – U.S. manufacturers historically lead the way in an economic expansion, but are still struggling to recover from the recent recession. Since July 2000, manufacturing has lost 2.3 million jobs, many of which have been outsourced or relocated overseas. Manufacturing output has shown virtually no growth since December 2001. (See figure 1)
  • Investments are Going Elsewhere – U.S. manufacturing’s share of capital investment and R&D expenditures, once a dominant feature of our nation’s commitment to progress, is diminishing. While U.S. manufacturers conduct two-thirds of private R&D, their R&D spending between 2000 and 2002 grew at only half the pace of the previous decade.
Source: Bureau of Labour statistics
Figure – 1

This study also quantifies the issues around the US’s bleak balance of trade: “Manufacturing exports as a share of GDP have contracted since 1997, reflecting the strong dollar overseas, the impact of the recession on our trading partners, the terrorist attacks in the United States in September 2001, and increased global competition. The U.S. trade deficit has ballooned to historic highs – reflecting an increase in purchases of foreign-made goods, especially from countries which do not freely float their currencies.”

OK, shrinking taxes, expanding debt, poor trade balance; hmmmm, doesn’t sound like how my parents taught me to managed my finances.

But, why should the rest of the world care-

The US, like it or not (and that this is a political view point, not for debate in this publication) is the world leader in pulling together disparate points of view about just about everything; trade policy; IMF bailouts (another controversial topic[2]), peace keeping, etc. In addition, from an industrial and innovative standpoint, the US is the big global inventor of things: We innovate, and generally share those innovations with the rest of the world-from healing global disease, to technology advances. Other country’s economies grow when they build, buy, and earn profit from these innovations. America (including Canada) as an Economic Center of Expertise (ECE) for innovation needs to play this urgent and leading role for the rest of the world. The fact is we have the legislative policy and investor base that supports intellectual property discovery. Skittish capital markets, along with our shrinking manufacturing base, put that R&D investment pool at risk.

The Falling Dollar

Currently, Washington seems to be enamored with quick fix strategies such as tax cuts to stimulate consumer spending (which seems to translate into more goods purchased from foreign sources). And the US government is encouraging some free-fall in the dollar, which supposedly helps the balance of trade. If American goods are cheaper, so the argument goes, then more goods will be purchased outside the US. This is true for farm goods, but not industrial. The impact, though, will be seen over the long haul. Why would anyone invest in an economy where your investments are based on a shrinking currency value? That is why countries like India have poor stock markets and countries like China and Vietnam have growing markets. It is not just their increasing industrial base-a country’s currency value also rises with favorable balance of trade and the rising income of its citizens.

So, with America’s shrinking capital markets, less R&D, less innovation-it’s not a pretty spiral.

No industry is an island. Value chains are created by innovation and demand, creating commerce. An innovator has to have her dream manufactured, distributed, sold, implemented, and serviced. That creates the value chain. For example, in the software industry, ecosystem value created ratios can be very high. Software license to service revenue ratios vary from 1:2 to 1:20. Also in the ecosystem are hardware or hosted services to run the software, ongoing maintenance fees, educational services, etc., raising the total ecosystem’s value from the pure demand of say $250,000 for the software to close to $1M by the time the project is complete. These ripple effects hold true for manufacturing, as well.

Another way to look at it, in a recent article in Scientific American, they charted the network affect-what they called Scale Free Networks[3] -and found that whether the subject was the Internet or the brain, “that complex systems have an underlying architecture governed by shared organizing principles.” They found that a small number of nodes are at the heart of the network-the organizing principle, the foundation, the driver, and the rule setter. The Economic Center of Expertise (ECE) for an industry crafts these organizing principles. And the manufacturing base frequently is the driver of ECE creation or at least sustains it.

Innovation Means Wealth-And Peace!

The risks are high-but compete or perish! Although the NAM study focuses on government policy, Washington cannot really be the answer. The world markets must be open to create a better world. Better business practices and processes, and supply chain management opportunities are still at the surface-business differentiation and customer service; innovation on process, service, and product!

In the end, this is not a US parochial issue. We have learned in modern economics that it is not a fixed sized pie (if you get more, I get less). It’s a growing pie! But innovation is the key stimulator of wealth. The fact is, global prosperity and productivity truly means peace on earth. When you are innovating, building, and working, you don’t have time for war.

[1] “Securing America’s Future- A Case for a Strong Manufacturing Base” by Joel Poppen and Company

[2] Another controversial topic which is coming soon for our Policy dialogues

[3] Scientific American, May 2003, “Scale Free Network”, by Albert-Laslo Barabasi and Eric Bonaneau

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